Organization Costs Definition

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 29, 2023

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Organization costs is the cost incurred by a business from planning, organizing, and supervising its resources.

These costs are an inevitable part of any business organization. They include so many factors, such as labor time, capital investment, training, and development costs.

This includes anything that would help managers set budgets so as to increase productivity in the future.

Planning requires time and money, as do training and development programs for workers.

A company must first accumulate enough knowledge of how every part of the system works together before it can organize them effectively.

There are two major concerns that the company has to keep in mind.

Firstly, it has to consider the present production processes, and secondly, it must also think about how changes or modifications will affect future productivity

Why Do Organization Costs Exist?

Organization costs exist because managers need to spend money in order to plan for labor, increase capital investment, and develop training programs.

While these costs might not show up on the balance sheet, they are also necessary in order to ensure that employees will remain productive over time.

Why Are Organization Costs an Investment in Future Productivity

Organization costs are considered an investment because they ensure that a business will remain productive even when there are changes to the original product line or workforce.

Managers can rest assured that their resources will continue to be utilized, regardless of how many employees the company has lost over time.

Organization costs are necessary because businesses need to be productive enough to support their cost of labor and equipment.

This ensures that a company will continue to stay afloat even if there is a dip in the demand for its products or services.

When Should a Business Invest in Organizing Its Resources?

A company must invest in organization costs when it goes through a major restructuring or undergoes an expansion.

This is because new personnel are hired, old equipment are replaced, and the entire operation starts over from scratch.

Organization costs are necessary during these times to ensure that production will remain consistent once the transition period ends.

Examples of Organization Costs

Labor Time

An example of an organization cost is labor time. People need to spend time planning, organizing, and supervising the resources they have in order to ensure future production.

This inevitably takes up some of their working days, but it also ensures that a company will continue to produce even if a worker goes on vacation or gets sick.

Capital Investment

A business must accumulate enough capital to ensure that employees will remain productive in order to continue producing goods or services.

This can be in the form of machinery, equipment, tools, or other items that support the workers' efforts.

Training and Development Costs

This is an example of organization cost because managers have to spend money to train or develop their employees' skills over time.

These programs are necessary since workers come and go, but they also ensure that products will continue to be produced regardless of who is currently working at the organization.

Organization Cost vs Fixed Cost

Organization cost is NOT the same as a fixed cost. Fixed costs are a type of cost that does not vary, regardless of how much work is being done.

An example of this would be the rental of office space. Rent must be paid every month whether or not something is produced that particular month. This means that there are no organization costs associated with rent.

External Cost vs Internal Organization Cost

There are two types of organization costs: external and internal.

External Costs

External costs refer to the cost that is incurred by an outside entity in order to do business with another company.

An example would be buying new equipment or hiring workers.

Internal Costs

Internal costs, on the other hand, refer to the cost that is incurred by inside employees in order to do business with each other.

An example would be planning for future production or training one another.

How to Save Money on Organization Costs

There are ways businesses can save money on organization costs. For example, a business can buy used equipment instead of new ones, repurpose old materials for future projects, and share resources with other companies.

Additionally, companies should train workers early on to see how much they will cost the company over time. This will allow managers to adjust their budgets accordingly.

Final Thoughts

Organization costs are necessary for a company to stay productive. These costs must be factored in when budgeting for operations, but they can be reduced by making smart purchases and investing in the skills of current workers.

Businesses must invest in assets that can ensure continuity, such as equipment and training programs.

This will ensure that the company remains profitable because workers will continue to produce products even if there is a change in management or market trends.

Organization Costs FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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